Wednesday, 28 January 2015

Debt restructuring: a proposed principle

With Greece under Syriza about to enter negotiations with the
Troika, there has been much discussion of what might happen, and what should
happen. This post is in the ‘should’ category. In the past I have argued that the Troika should welcome the
opportunity to put right earlier mistakes. There should be a large amount of
guilt, or at least regret, on their side. I will say why in a minute, but just
to show that I’m not living in a dreamland, read this FT piece by Reza Moghadam, the former head of the
European Division of the IMF.

In reality debt restructuring is a bargaining game, but I want
to suggest a general principle that any agreement should hold to. That
principle is that there should be no significant increase in unemployment above
its natural rate (let’s call this excess unemployment) as a direct result of
having to pay interest on any government debt. Unemployment above the natural
rate when there is no excess core inflation is a waste of resources as well as
being damaging to most of those unemployed, so any deal that creates such
unemployment, or allows it to persist, should be regarded as the result of
creditors acting against the social good. Indeed you could easily argue that it
involves creditors acting against their own self-interest, because the more of
an economy’s resources you waste, the less is available to pay its debts.

This is why the Troika should feel guilty, because by not
allowing Greece to default on all its debt back in 2010 it helped create a
situation where over half young people in Greece are unemployed. Some excess
unemployment was inevitable in Greece after 2010 because the country had become
very uncompetitive, and the impact of this on demand had been offset by large
primary budget deficits. (This problem was made worse by pre-recession cost-cutting in Germany.) However, as I have argued in the past in the context of Latvia,
the efficient way to restore competitiveness is to have small but persistent
excess unemployment: a ‘short sharp shock’ is much more costly. The Troika
imposed much too much austerity on Greece in a futile effort to avoid full and
early default.

The process transferred the ownership of the remaining
Greek government debt from the private sector to the public sector - other
Eurozone governments and the IMF. The transfer to other European governments
was wrong in two respects. First, it was another example of governments bailing
out their own banks and other financial institutions with no costs to those
institutions. Second, it made any subsequent restructuring of Greek debt much
more difficult politically. If there had been full and immediate default there
would have still been need for additional lending to Greece to give them time
to adjust their public finances and avoid a large increase in unemployment, but
that is what the IMF is for. If the Troika had not been involved, the IMF may
well have gone for early and complete default.

So much for the past and guilt. What about what should happen
now. The priority is for Greece to reduce unemployment as quickly as possible.
That would be consistent with my principle, and so should be a priority for
both sides. It could be achieved, for example, by suspending all interest
payments on all Greek debt immediately, with those payments resuming on any
debt not written off once excess unemployment had been eliminated. Paul Krugman
shows
what a positive effect no longer having to run a primary surplus to pay
interest could have on the Greek economy. (As Paul Krugman observes in a separate post, and OECD data
confirm, the competitive position of Greece is now back to the level it was
when the Euro was created.)

What about all the ‘structural reform’ that the Troika has
imposed. The new Greek government is likely to introduce plenty of structural
reform of its own, so encouragement from outside is hardly necessary. If it is
not the structural reform that the Troika prefers, then I’m afraid that is the
price you pay for having a democratic Europe. We know that some within the Eurozone bureaucracy
have little respect for national sovereignty, and it is time these people were
put in their place.

What about the backlash from voters in Northern Europe? I find arguments that say this should be (we are
talking about what should happen here) a barrier to debt restructuring hard to
take seriously. Northern Europe’s politicians foolishly socialised the Greek
debt held by their own country’s financial institutions. To say Greece has to
pay the price of this mistake seems perverse. What about other periphery
countries wanting to revise the terms they were required to accept for Troika
help? Well maybe they are right to do so. And finally what about the argument
that this would ‘frighten the markets’ (always a good tell
by the side that uses it that their argument is weak)? The markets will be unsettled
far more if negotiations break down because creditors refuse to give enough.

Germany is now the third most popular country of origin for
pageviews of my blog, which is something I’m very happy about. I’m sure at
least some of those readers will be worrying that any renegotiation violates
‘the law’, or at least contracts that have been previously agreed. I have very
little sympathy with that argument. The British government was also protecting
the rule of law when it provided armed guards to ensure that shipments
of grain left Ireland during the famine of the 1840s.

Even if you do not accept my argument about the role that
creditors played in inflicting great harm on the Greek economy and people in
the past, these creditors have a clear choice for the future. Current levels of
unemployment in Greece represent a criminal waste of resources and source of
unhappiness, and it should be brought to an end as soon as possible. Creditors
can make this happen with a small economic cost to themselves by at least
suspending all interest payments until the Greek economy has recovered. It is a
cost that creditors are almost certainly going to have to pay at some point
anyway. As Martin Wolf says in an excellent column, “What cannot be
paid will not be paid.” It would be much better for the Greek people and Europe
as a whole for the Troika to admit this now rather than later.

52 comments:

"Current levels of unemployment in Greece represent a criminal waste of resources and source of unhappiness, and it should be brought to an end as soon as possible."

So is Simon planning to take a vacation in Greece to reduce said unemployment? Or planning to start a "Buy Greek" campaign? He seems to be waving his hands to go from: (1) there is much suffering; to (2) certain actors should lose money. Why should Finnish money be lost and not Simon's? Since UK banks were (if I recall correctly) number 2 in the Grecial bailout department, why isn't the UK liable for a fair amount? Or is this just a case that Simon finds it easy to attribute other people's money (but not his own! and not the UK's!) to alleviate suffering?

Just to add, Simon is very condescending about northern European voters. But let's see him, or any UK politiician, going before the UK electorate to explain that they need to ante up substantial money to support Greece in its suffering. If Finland owes something, the UK owes much, much more.

My argument applies to whichever country's debt is involved. In Eurozone countries did bail out UK banks, well I cannot be held responsible for that. If for some strange reason I did hold Greek government debt, I certainly would have written it off completely by now, but if I hadn't I would certainly accept my proposal. Is it really too much to ask? Finland is going to lose money - you either accept it now, or you accept it later and cause a lot of harm as a result.

No your argument does not apply to whichever country's debt is involved, except in a contrived way by your announcing a principle at the beginning which only mentions debt. But there is no more moral reason to take money from creditors than from anyone else. It's perhaps easier to take it from the countries whose debt is involved, but the same effect could be had by the UK just giving money to Greece. There's great suffering in Greece, right? So do something about it! The UK is a member of 2 out of 3 of the troika institutions. It has a responsibility just from that fact alone. Not to mention, again, that UK banks got bailed out.

That is, there is no justification that the money must come from the current creditor nations, other than that they benefited in the past and so are "guilty". Well the UK also benefited, so by this reasoning it should also pay.

And the point of this exercise, I hope you realise, is that when someone asks you or your country to pay something for the mess which is Greece, your first and only thought is to say, "Of course it's not my responsibility!" And to think of an excuse why it's not. So maybe you can apply your reaction and use some elementary empathy to understand how other people in other countries might react.

At the moment Greece is having to run primary surpluses to pay its creditors. My suggestion, which is fairly modest, is that these interest payments should at least stop until the Greek economy has recovered. It seems fairly obvious why the creditors are directly involved. To be blunt, it is their insistence that the interest is paid now which is causing the unemployment. I do not think I should be accused of not applying empathy.

Your argument does not make sense, why should anyone other than the creditors, those holding Greek debt take the hit? If the creditors didn't want the Greek debt, they shouldn't have bought it.

As SWL points out, there really is no scenario in which Greece's creditors are going to get their money back, so they may as well negotiate for a settlement that eases the economic pressure on Greece and ultimately minimises their losses.

"Anonymous" you didn't seem to read any of this blogpost, which Wren-Lewis just repeats in his replies to you.

"So maybe you can apply your reaction and use some elementary empathy to understand how other people in other countries might react."

Maybe you could use some empathy to see the situation from the Greeks' viewpoint.

Mr. "Anonymous" - you need a history lesson.

Calvin Coolidge too your position exactly. He would have has empathy for the Northern Europeans. In the 20s and 30s after WWI, the British and French said they wouldn't ease up on demands of war reparation payment from Germany unless American eased up on its debt demands. Coolidge is reported to have said "They hired the money, didn't they?" So no renegotiation of debt repayments. The Germany economy gets worse and worse and you get the rise of the Nazis. Not only did France and Britain not get their war reparations, they had to suffer another war.

So put aside empathy for the Greeks. The decision to bail out the Northern banks and socialize their loses but not ease up on the Greeks could have negative consequences. Hopefully Syriza channels things in a more positive direction and inspires other victims of the Northern Banks' malfeasance in other countries.

"that these interest payments should at least stop until the Greek economy has recovered." Fine. And the UK can make a contribution, by chipping in 15% of the interest payments to those no longer receiving it. Simple as pie.

" It seems fairly obvious why the creditors are directly involved." Obviously they're directly involved. So? Your argument is (1) there is great suffering in Greece; and (2) the creditors benefited. Well, the UK also benefitted. And the UK was also involved in bringing the suffering on Greece, since it's part of two out of three legs of the troika. *You* Simon have about as much responsibility for Greek suffering as most in northern Euroland. Yet you wash your hands as quckly as you can.

" I do not think I should be accused of not applying empathy. " Somebody with empathy would say, "There is real suffering. I should do something about it." You say, "There is real suffering. Not my job." And my remark about empathy wasn't concerned anywya with any apparent attitude you have concerning Greece suffering; it's about your condescending and cavalier attitude towards Northerm European voters. Look how quickly you renounce *any* responsibility yourself to do something helping Greece. You won't even say you might take a vacation there for Pete's sake. It's not even, "Well the UK might chip in a little bit." It's, "Not us obviously. Nope, not us." So maybe you should understand a little bit why a Finnish retiree also doesn't think it's his or her responsibility. No?

@Anon 6:58 Reading comprehension is a good thin. You should try it. First, where does Simon say the UK should do nothing? Second, why are you conflating Simon (who really doesn't have the power to make policy--were this the case, I doubt he'd have time to write a blog) with other policy-makers whom Simon is criticizing? Third, Simon does seem concerned about the suffering and is doing what he can (see my point above). As for the (hypothetical?) Finnish retiree who doesn't think he is responsible--well he is, a little, but really should be mad as hell at those who made the investments and made the policies are who are not being held accountable for the original problems and/or for creating new ones.

And this other "Anon" is giving a perfect example of the Prisoners' Dilemma in action. This is perhaps the real impediment to any useful political action--and the elite (especially on the Right) in Europe and the USA have been wielding it skillfully (in the USA at least since Nixon's Southern Strategy).

The German and Finnish taxpayers who want to get back as much of their money as they can, need a productive thriving Greece. Crippling Greece with 25% unemployment is as inane as it would be if a farmer were to starve his dairy herd until the milk dried up. A cruel creditor might profit from impoverishing a country that had rich mineral resources and little human resources but Greece's greatest potential is its people. Every unused Greek man-hour (and factory/cafe/boat etc hour) lost due to unemployment is a squandered opportunity to repair the situation.

Well, I, for one, hope that Syriza succeeds. It's silly to expect more 'reforms' (i.e. cuts) when there is a record primary surplus and the population has suffered enough, and the debt-to-GDP ratio keeps climbing because of contracting fiscal policy and interest payments. I'm not sure what the majority opinion of germans is. The internet is fairly friendly towards Syriza, but the most important daily newspaper (by circulation, not by quality) headlined yesterday with news on "what the greeks now receive", i.e. as if Syriza steals German money to hand out presents. There is a logic to the coalition between Syriza and the Independent Greeks. The centrist opinion across Europe is pro-austerity, even social democrats, in Germany, as well as in Greece, are for it. Opposition to the centrist course is only possible from the fringe, either left or right. In Germany, you see that with the new populist right party AfD and the anti-muslim rallies that have received a fair bit of attention. Those rallies however, are not just against muslims, but against Merkel's centrist regime, which does not allow alternatives. The grand coalition, either official as in Germany, or inofficial as in Greece, imposes its opinion of its own correctness on the whole country. Your mediamacro seems to exist everywhere now. Possibly because the financial sector is international, well-connected and stronger than ever before.

Elite power is part of the equation. But so is "common sense." Simon, Krugman, and others actually have been making counter-intuitive point--this doesn't mean they are wrong, merely that their points don't align with "common sense" (which need not be commonsensical, but that's a different topic). There's this Old-Testament-inspired-fire-and-brimstone-Protestantism underlying a lot of the appeal of austerity beyond the elite. That and a Prisoners' Dilemma, where many Europeans have forgotten they're all in the same boat.

I think the real issue is that most of the elite don't care about average people until average people get up their dander and use the one advantage they have--numbers. Simon can argue these points until he's blue in the face. What he needs is a good political scientist/sociologist/marketing specialist to put his macroeconomic argument into digestible sound bites that would fit on placards, and then find another group of political science and sociology grad students to go out and try to mobilize people. Hey, something similar worked for socialists over 100 years ago!

I am sympathetic to the plight of the Greek people - the macroeconomic numbers are staggering - let alone the human cost of this.

But - unlike in (e.g.) Spain - the Greek crisis was principally a problem of poor fiscal management prior to the crisis. Wouldn't your proposed 'principle' lead to the risk that any small eurozone country would not feel the need to behave in a fiscally conservative manner in the future?

Is there a way to help the Greek people while simultaneously minimising these moral hazard concerns?

No. As I said, it would have been painful enough achieving primary surplus in a more gradual way with less austerity under IMF assistance. The moral hazard problem is not a big issue here. If it still worries you, you should be asking what has happened to the politicians who secretly ran up all this debt in the first place.

Europeans who dislike the death penalty (supposedly used in America as a deterrent to future crime) should also be against punitive policies towards Greece as a means to preventing future moral hazards.

well the vote is indeed a moral dilemna : are they responsible or not? And if yes to what extent ? Now for one, this also questions the efficeincy of the representative democracy, second if someone crashed their car on a wall because they drank to much, would nt you help them get out of it, provided the car s not on fire?

To put this in a more long term perspective, the greek bailout will cost us way less than the insistance of germarny on a strong euro, while american printed dollars, I mean we re talking of a competive offset of 10 to 30% for 10 years here.

However, I find it odd that you cite as authoritative someone--Reza Moghadam--who is directly responsible for for backing a series of policy judgements that you abhor. These include the austerity imposed on Greece itself in 2010, the switch to austerity in the Euro Area as a whole at that time, and the austerity adopted in the UK. And not forgetting the unprecedented errors in the macro projections in the 2010 Greek program for which he was directly responsible.

And continuing in this vein, notwithstanding the good general case for Greek write-downs, his specific suggestions on that are sucked out of thin air--why a cut by 1/2 rather than 3/4 or 4/5, how does 110% of GDP leave Greece in a good position, and how does any of this relate to the other peripherals?

All that said, you are not alone as a leading anti-austerian in blessing one of austerity's high priests; Martin Wolf seems to be similarly afflicted.

As defaulting and retaining the euro was never a feasible option the only alternative to the much-criticized 2010 Troika bailout would have been an Argentine-style default. Argentina’s exit from its own “currency union” with the U.S. was traumatic and devastating; too many broken contracts and promises; its social fabric has never been repaired even though Argentina had a very competitive agro export sector that could exploit the massive devaluation from day 1. There is no such thing in Greece; recovery would have been slow, from a very low base with an impoverished population, the overall social situation would be much worse than today. It is also unrealistic to assume optimal policy making in such a scenario, Argentina should be a warning. I am surprised how lightheartedly people talk about defaulting. The new Greek government has a weak bargaining position and needs to tread lightly. A haircut on official debt is essentially stealing from the taxpayers of other countries, very different to the haircut imposed on publicly traded debt in 2012. Also, if Greece were to get this type of debt relief, Portugal and Ireland will very justifiably want the same. This will poison Euro zone politics even further.The best deal Greece can – and in my view should - get is a further extension of the repayment periods. Push it back another 20 years.

"A haircut on official debt is essentially stealing from the taxpayers of other countries". I'm afraid that is what the politicians and media in other countries have allowed you to think. In reality they chose to invest in an asset where the chances of getting their money back was always slim. You should perhaps ask them why they did that. Why didn't they allow a full default in Greece, and leave any assistance to the IMF. Who were they trying to protect?

Exactly! Too many in Berlin, Washington, London, and New York have been using this argument (taxpayers will suffer) or playing the victim to avoid their own accountability. James Galbraith has been asking this type of question for years. When will people wake up?

When G Kirschner says that hair-cutting the EU held Greek debt amounts to stealing from taxpayers, I think it is crucial to unpick whether taxpayers would actually ever pay anything more as a consequence of such a haircut.

We tax to prevent government debt levels getting out of hand. The way to keep debt levels proportionate (such that they can be serviced easily out of current production) is to ensure that we have plenty of current production and are well set up for future production. That means having a well trained, work experienced population and new innovations, good infrastructure etc etc. Having a generation sitting on the sidelines atrophying away is REAL fiscal irresponsibility. That is REALLY stealing from taxpayers.

Who were they trying to protect? I thought the banks and institutional investors already got their part of the burden sharing in 2012 when Greece imposed a haircut which I think amounted to € 110 bn, not a trivial amount.I don't think EU politicians or the IMF expected back in 2010 that they would not get their money back. Even Argentina settled the IMF debt in full.Again, the default proponents fail to see the bigger picture. What is their response if Ireland and Portugal want the same? Spain contributed more then € 40 bn to the rescue programs and has to repay another € 40bn from its back recap loan. What is left of the credibility of the EU support mechanisms if default becomes a regular feature of the euro zone.

the point simon makes is that a lot if not a majority of the allocated money went to the european banks and not the greek people who therefore should not be held accountable for it. the figures are easy to find, for example:http://www.businessinsider.com/banks-exposure-to-greek-debt-2011-9?op=1&IR=T

Let first see how the bailout to Greecef was done, to find that taxpayer that gave his/her money?Where is that abdominable taxpayer that gave money to Greece?

National central banks printed and signed new debts and gave it to ECB as colateral for bailout money. Nations in EZ did not sell it to market, they gave it to ECB. ECB then proceeded and created Greek debt on its computor in order to cover old Greek debts that EU banks held. ECB 'printed' that new money to pay off banks by using computor balance sheet.

If Greece is to repay that debt, let's say tomorrow, ECB will wipe out such debt and also wipe out National central bank debts at ECB, and destroy such numbers 'money' from existence.(If Greece is to default, then National CBs would have to come up with such money or just renew dates on old bailouts with a slightly larger sums)

So, Forgiving debt to Greece would involve wiping out record of debts to all EZ members that provided notices of debt (not taxpayer money) and no taxpayer would loose money nor get any.So the difference to taxpayers in EZ weather forgiving debt or paying debt is non existent, if they agree so. The Greece's debt is accounting fiction as Krugman called it.

But Northerners do not want to loose the mean to terorize Greeks and show it as an example to Italians, Spaniards, Portogeeze that are comming up as next in line. It is all about that, as an example of power that North has over South.

You say “As Paul Krugman observes in a separate post, and OECD data confirm, the competitive position of Greece is now back to the level it was when the Euro was created.” The Krugman post you link to there doesn’t actually show that: it just shows a chart according to which Greek competitiveness has improved by about 15% since around 2001.

Also according to a chart in Martin Wolf’s FT article today, Greece’s exports currently equal its imports. If I’ve got that right, the Greece would have a serious external deficit if it boosted employment to the extent you suggest. So it’s important to get this competitiveness point right. Do you have a link to the OECD data you mention?

"Greece’s exports currently equal its imports. If I’ve got that right, the Greece would have a serious external deficit if it boosted employment to the extent you suggest. So it’s important to get this competitiveness point right". You solve this if you use a portion of the resources released by restructuring debt / waiving interests to reduce taxes and social costs on labor, which lowers gross (not net) labor costs.

You argue that that 'there should be no significant increase in unemployment above its natural rate...as a direct result of having to pay interest on any government debt' and that the priority on both the Greek and the Troika side should be to reduce unemployment as quickly as possible to an equilibrium level (which you call the natural rate).

Yet, according to Eurostat in the year to Q3 2014 the employment rate in Greece (which I consider to be the more appropriate measure of unused resources that the unemployment rate) grew by 1.1 percentage points from 49.1% to 50.2% - faster than the EU average growth of 1.0% and faster than all of the largest EU countries except Poland, the UK and Spain. Although this is still substantially lower that the EU average (65.5%) and still well below Greece's pre-recessionary level of around 60/61%.

Yet despite these very low levels are you not worried that there may be some speed limits of the rate of growth in the employment rate and that what I presume you see as a boost to demand might cause frictions in the labour market and possibly have adverse consequences?

And of course there is the presentational point that - in the terms that you have chosen - Greece is improving faster than Germany, Italy, Austria, France and all the Benelux countries?

BillYou are talking about rates, what if many emigrated from Greece?Over 100 000 greeks of working age emigrated in last two years. That would bring down the rate without any new job, wouldn't it?Acording to eurostat there is 100,000 more employed in Q42014 then year earlierwhile 200,000 les of working age people in Greece.

I agree with you that employment is a more appropriate measure than unemployment which not only suffers from the issue you identify but also the trends in employment can be masked by movements in participation. However, in terms of both equilibrium levels of labour market variables and also speed limit issues I think that employment rates are preferable.

However, in this context which employment variable used does not change things much. The story is essentially the same whether you use employment levels (not quite the jobs measure you prefer) or rates. The percentage increase in Greek employment levels is amongst the fastest in the EU at 1.4% and is, in fact, well above the EU28 average of 0.8%. [Eurostat numbers]

The point I was trying to make is that if you are focusing your macroeconomic policy on changing labour market (quantity) outcomes then the argument for a demand boost for Greece is weak.

And, at a more general level, following this line of argument the case for introducing QE in the EU/Eurozone is also not strong. The 1.0 percentage point annual rise in the EU to Q3 2014 (admittedly boosted by the above average growth in the UK) is greater than the latest growth in the US CPS employment (0.6 percentage points in the year to December 2014 (BLS)); the same as in Japan; and much higher than in Canada (both UK Labour Market Stats Bulletin Table 19).

In general, GDP and labour market developments seem to have been decoupled not just in the UK but in most of the developed world. Most countries having seen 'job rich' developments- it would suggest that the case for further demand boosts - in Greece or the Eurozone - would really need to be made on macroeconomic rather than labour market grounds. And then there is a question of whether the sorts of innovative financial interventions being used are likely to be effective. [And given the decoupling of the labour market from GDP how would the success be measured?]

Dear southern European citizen who are afraid that I will not be able to repay my debt to your government, please bear in mind the following numbers:

I represent (roughly) 11E-6 of the Greek people.

I also represent (roughly) 1.3E-6 of the Greek unemployed people (I happen to be unemployed for more than 2 years).

Finally, I also have allotted to me a slice of (roughly) 0.03E6 of the Greek outstanding stock of debt.

I sincerely hope you do understand how my 1.3 millionths of the Greek labor force, that are unemployed for more than two years, cannot possibly generate a stream of income yielding (approx.) 30 thousand euros in order to repay the debt that is allotted to me. (*note how this debt was not borne by me personally, but was the outcome of really bad economic management by our respective governments).

Please, consider the following: the average 'compensation of employees' figure (gross wage per capita - I use it as a proxy for earnings) over the period 2005-2009 was equal to (approx.) 0.00701E6 euros, while the respective number for the period 2010-2014 was equal to (approx.) 0.0062E6. The decrease is roughly equal to 800 euros. (To give a measure of proportions, the minimum wage in Greece is 586 euros/month).

Now, if you take into consideration that these numbers represent gross earnings then perhaps if you cut them by a third or perhaps more (to account for the loss of purchasing power because of inflation, especially in the first half of the sample) you'd reach a number approaching the income that is available to those employed after we evenly divide it over the whole population (less than the 0.0062E6 euros per capita, per annum figure).

Do you begin to see the problem?

Can you understand how a per capita gross income of (approx.) 0.0062E6 euros compares to a per capita due of 0.03E6 euros in debt? My debt is (approx.) 4.8 times larger than my income. And that applies for all 11E6 of us. (*obviously I'm not taking into consideration the fact that a person actually needs to live off of its income too instead of just repaying its debts)

Can you wrap around your head that even if my income stream doubled in size overnight (in a stronger economy scenario), I'd still owe (approx.) 2.4 times of that hypothetical income?

How do you propose I repay this burden?

PS. I also represent (roughly) 2.25Ε-6 of the Greek voters that voted for SYRIZA in the latest national elections (Jan 25, '15)

Whom did you vote for in the elections leading up to 2009? Did you really manage to vote for someone who was not crooked? Who was it? If you did, what is your attitude to democracy? After all, the majority of Greeks, whether left or right, elected crooks. What should happen to those voters, in your opinion?

With all due respect, I do not think you guys get it. The debt cannot be repaid as a matter of fact. It's not a matter of intention or refusal for that matter. Economic reality prohibits it. Things just don't add up!

And obviously you are not suggesting equal blame and punishment to all, and all that in the name of democracy, right? Because that would be really sadistic, not to mention authoritarian in attitude. And besides that, IT WOULDN'T SOLVE THE DEBT PROBLEM.

And I won't bother stating the obvious fact that your premise is wrong. The majority of Greeks neither are, nor voted for crooks (this is the same as the fact that the majority of present day Germans for example are not Nazis).

The Greek sovereign debt crisis is not a result of mischievous behavior by some politicians servicing their electorate. It was a feature of the faulty eu edifice that amplified disproportionalities with no backstop.

And I would go so far as to say that the Greek economy collapsed in a controlled manner by actions or omissions of the people that handled the crisis and that made debt repayment even more difficult.

I think this misses the history and the perception of the character of Greece. Greece got into the Euro group by fraud with the help of some bankers. They are also inveterate tax avoiders. They were desperate for loans to save their country. They were given these loans. Then they got a haircut on these loans. They now want another haircut after being given all the money.

The new government may be of a different character to the previous ones but the moral question is not about debt repayments it is about Greek national character. Are they going to change as a people. If they were as honest at paying their taxes as other countries they borrowed from then they would not be in this position. Or will the new government just demonstrate that they are no different from anyone who borrows money from you to get out of a problem situation with no intention of paying it back.

No one was unwillingly deceived on this matter - those at the heart of the Eurozone needed the weak peripherals to join the club to make the whole enterprise worthwhile. That is surely obvious.

And to those who worry the Northern European taxpayer will be harmed here - these taxpayers were not lending money to Greece from 1999 to 2010, they only got lumbered in 2010. And who is to blame for that we may wonder...?

I agree with you about tax dodging. I don't understand why Greek people don't demand a wealth tax on the richest Greek Citizens (who are plenty able to pay it after all). I wouldn't want to be in a currency union with Greece. I think though in an ideal world they would be free to do things the Greek way and have an economy like they had before they joined the euro. But as things stand, with them in the eurozone, the bailout conditions are inane IMO.I think Tsipras says it well himself:http://syriza.net.gr/index.php/en/pressroom/253-open-letter-to-the-german-readers-that-which-you-were-never-told-about-greece"My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise."

Will the richest Greek Citizens be also imprisoned in Greece? Because if not, they'll use their wealth to relocate themselves to another EU member country, thereby moving out of reach of the wealth tax... and the tax base of Greece will have further eroded, making debt repayment ever more bleak.

Even if you do forcibly require the rich Greeks to stay by imprisoning them, they'll presumably be unable to do their jobs from jail (or will sulk at continuing to manage their investments well if they aren't assured that they will get to keep their profits)... and you'll see those rich Greeks eventually become regular Greeks.

You cannot tax your way out of a debt hole as big as the one Greece is currently in. They simply will never be able to do anything to dig their way back out without some substantial form of debt forgiveness.

Overall takeaway... Lending and borrowing have risk. Both parties should share the burden of irresponsible borrowing and lending practices and creditors should take a hit as well. I am in complete agreement. So where is the acknowledgement that without deficit spending there would not be this problem. Greece having its own currency would have just made it worthless and substituted where the problem surfaced.

To quote from the text: "Some excess unemployment was inevitable in Greece after 2010 because the country had become very uncompetitive, and the impact of this on demand had been offset by large primary budget deficits."

Creditors should have paid the price of making unduly investments in the first place. The banks and likes were able to folly politicians to share the risk with the tax payers. Blame the electorate and burden is now on them.

It would be rather savage and unnecessary to penalize only Greece while it was obvious from the beginning that serial-defauter-Greece shouldn't be part of Euro. Plus as Simon said penalizing doesn't help anyone but undermines democratic values we should all share. This is a dangerous development.

As a side note: I do not know how the ECB is allowed to bully democratic leaders. That is not within their mandate.

" the impact of this on demand had been offset by large primary budget deficits"

Well understood. What to do with an already existing deficit is not my issue. Not seeing the risk that having a deficit or large account receivable can get you into, in the first place, is my issue.

The desire to have lived beyond ones means was met with the desire of another party to show revenue growth by booking an account receivable as an asset, with the credit worthiness of the counterparty being an afterthought. All wonderful for everyone involved until the moment the payment comes due.

Then one side cries that their stuff was taken and they aren't getting paid, while the other side cries that they are not being allowed to consume to their desires. (People do not need to get fired, algebraically I think lowering wages across the board works as well – a free floating Drachma would do just that)

One side was sent false price signals by those continued purchases, therefore continuing to dedicate resources to produce products that had no real capable buyer, prohibiting their production mix from probably self-correcting to rebalance outputs to meet other internal needs, and therefore removing assets that could have been internalized for further growth and higher QOL.

The other side learned, that like little children, they can live without producing and therefore became even more uncompetitive.

If the point is that Greeks were the main responsible, they have been already punished, especially the younger Generation.

If the point is that ending the suffering of the Greek People will cause taxpayers in Germany to pay a price, well, the decision to socialize all present and future losses was made by Angela Merkel in 2010. She saved all creditors -Banks, hedge funds, other Investors- and transferred all future costs to the German taxpayers. And the funny thing is that the Germans fell in love with Angela because of this.

As an American from a relatively rich state, part of my tax dollars go to relatively poorer states with different ideologies and cultures, to pay for social security, healthcare and other programs which make life better for the people that live there. I am OK with this as I see we are all Americans.

A ridiculous comparison.US states do not have their own sovereign central banks. US states are not able to scream at the Federal Reserve to buy their debt instruments, which is exactly what Greece is doing at the ECB. US states can raise money only by floating private debt in the public markets, and are wholly responsible for redemptions and if they fail to do so will pay the price of high interest rates. US states have one fiscal agency, not 19. There is only one sovereign issuer of debt, not 19.The Euro cannot function so long as there are 19 fiscal agencies and one monetary agency. And, unfortunately, Europeans still hate each other as much as ever.

Keep in mind that the ultimate goal is to facilitate the re-entry of Greece to the private credit markets. This means removing risk, as higher risk means creditors demand higher interest, and the interest on Greek debt must be kept at a sustainable level or soon enough the Greek government is begging from European governments again.

So after the Greek state has a budget surplus, what does the market view as the single biggest remaining risk? The high level of debt of course! The prudent creditor can't dismiss 175% of GDP lightly. So if you wish markets to offer low sustainable interest, well, you'll have no choice but to cut part of that mountain of debt first.

This is what the European governments are extremely reluctant to admit. They'll probably want to get away with only lowering interest, but that doesn't change the fact that the debt will still be there when the Greek government starts replacing EU debt with private debt. So this is an instance where the markets aren't actually in perfect alignment with creditor governments.

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